Madoff And Enron’s Fastow Explain The Biggest Frauds In U.S. History


Why They Did It: Madoff And Enron’s Fastow Explain The Biggest Frauds In U.S. History via Paul Barrett, Bloomberg

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Eugene Soltes offers some interesting theories in his new book, Why They Do It: Inside the Mind of the White-Collar Criminal, including the notion that many senior business people operate in a moral “gray zone.” An associate professor at Harvard Business School, Soltes posits that they step over the line—breaking accounting rules or making illegal insider trades—in part because they rely on intuition. And, it turns out, their instincts stink.

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I’ll pay them all back. Promise.

“It’s like a comedy of errors,” Madoff told Soltes. “To cover the losses, I decided to take in money from hedge funds. And in order for me to do that, I had to commit to a long-term strategy that I wouldn’t send the money back [to investors]. I kept taking in more money, figuring that once the market allows me to do the strategy, I will be able to fix it.”  That’s the classic explanation of supposedly well-intentioned Ponzi masters: Eventually the scam will miraculously produce profits and everyone will be made whole. Madoff, 78, has plenty of time for correspondence, as he’s serving a 150-year federal prison sentence.

Oops, I forgot about right and wrong.

“If I had the character I should have had, I would have said, ‘Time out,’ … but I didn’t,” Fastow, the former Enron chief financial officer is quoted as saying. “The reality is, if at any point in my career I said, ‘Time out, this is [expletive]. I can’t do it,’ they would have just found another CFO. But that doesn’t excuse it. It would be like saying it’s OK to murder someone because if I didn’t do it someone else would have.” Fastow, 54, served six years for his role in setting up off-balance-sheet “special purpose entities” used to conceal Enron’s true financial condition.

Blame my ego.

“The board would give me anything I wanted,” Kozlowski told Soltes. “We believed our own press. … With myself and others—even the board—you become consumed a little bit by your own arrogance, and you really think you can do anything.” Kozlowski, 69, was convicted in 2005 of crimes related to his receiving tens of millions of dollars in unauthorized bonuses. He served six-and-a-half years in prison.

Read the full article here.

Why They Do It – Description

Why They Do It: Inside the Mind of the White-Collar Criminal by Eugene Soltes

Rarely does a week go by without a well-known executive being indicted for engaging in a white-collar crime. Perplexed as to what drives successful, wealthy people to risk it all, Harvard Business School professor Eugene Soltes took a remarkable journey deep into the minds of these white-collar criminals, spending seven years in the company of the men behind the largest corporate crimes in history–from the financial fraudsters of Enron, to the embezzlers at Tyco, to the Ponzi schemers Bernie Madoff and Allen Stanford. Drawing on intimate details from personal visits, letters, and phone calls with these former executives, as well as psychological, sociological, and historical research, Why They Do It is a breakthrough look at the dark side of the business world.

Soltes refutes popular but simplistic explanations of why seemingly successful executives engage in crime. White-collar criminals, he shows, are not merely driven by excessive greed or hubris, nor do they usually carefully calculate the costs and benefits before breaking the law and see it’s worth the risk. Instead, he shows that most of these executives make decisions the way we all do–on the basis of their intuitions and gut feelings. The trouble is, these gut feelings are often poorly suited for the modern business world.

Based on extensive interaction with nearly fifty former executives–many of whom have never spoken about their crimes–Soltes provides insights into why some saw the immediate effects of misconduct as positive, why executives often don’t feel the emotions (angst, guilt, shame) most people would expect, and how acceptable norms in the business community can differ from those of the broader society.

Why They Do It – Review

“By showing us how well-educated and well-meaning businessmen come to commit terrible crimes, Eugene Soltes has done a great service to the business community and society. This landmark study of business gone wrong should be required reading for all people in business, MBA students, business school faculty and staff, and regulators and policymakers.” —Andrew Lo, MIT Sloan School of Management

“This book is a deep and important analysis of one of the most important and least studied problems of our times: corporate crime. But it is also a page turner.” —Luigi Zingales, University of Chicago Booth School of Business and author of A Capitalism for the People: Recapturing the Lost Genius of American Prosperity

“When you read of yet another corporate titan who has it all—money, fame, power—but who blows it all by straying across the line separating aggressive risk taking from crime, you’re driven to ask, what possessed them? Soltes’ book provides a rare, intimate, and fascinating glimpse into the series of decisions, each one mundane enough, that lead by steps to high crime. Leaves you wondering, could it happen to you?”—John Coates, former trader and author of The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body, and Mind

“For those who wonder why the Madoffs, Kozlowskis, and other scamsters embark on careers of fraud, this fascinating book reads like a fast-paced novel that details the motivations and consequences of white-collar crime.”—Arthur Levitt, former Chairman of the United States Securities and Exchange Commission (1993-2001)

Why They Do It

Why They Do It: Inside the Mind of the White-Collar Criminal by Eugene Soltes

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